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The markets have been expecting a recession since beginning of last year, that’s why people say this is the most anticipated recession ever. A recession that hasn’t started yet or at least hasn’t been officially announced yet. Let’s dive into what a recession is and factors must be met in order that a recession is publicly announced.
An official definition of a recession may vary depending on the country or region, but in general, a recession is commonly defined as a significant decline in economic activity that lasts for an extended period of time.
For example, the National Bureau of Economic Research (NBER) in the United States defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” The NBER does not use a fixed rule or formula to determine whether an economy is in a recession but instead relies on a range of economic indicators and considers various factors such as the duration and severity of the decline in economic activity.
Similarly, the European Union defines a recession as “a period of at least two consecutive quarters of negative growth in gross domestic product (GDP).” This means that the economy must have contracted in size for at least six months before it is officially classified as being in a recession.
Overall, an official definition of a recession typically involves a significant decline in economic activity that is sustained over an extended period of time and can be measured using a range of economic indicators.
The National Bureau of Economic Research (NBER) considers 4 factors to determine a Recession:
1- Industrial production
2- Payroll employment
3- Inflation-adjusted personal income
4- Sales of the manufacturing and trade sectors
Unfortunately these are lagging indicators, taking a full six months to get recognized and announced by the NBER. Since recessions typically last 6-18 months, the recession could potentially be over by time the announcement is made. In theory we could be already be in a recession
We already had a technical recession in 2022. A technical recession is described in Europe by two consecutive quarters of negative growth in real GDP. Q1 and Q2 of 2022 had a negative GDP growth.
Let’s have a look at each NBER indicator:
1. Industrial Production:
Declined -0.22% in the last 12 months (as of Jan 2023)
2. Payroll Employment:
Declined -1.11% in the last 12 months (as of Jan 2023)
3. US inflation adjusted personal income:
declined -2.48% in the last 12 months (as of Jan 23)
4. Sales of manufacturing and trade:
increased approx. 1% in the last 12 months (as of Jan 23)
Conclusion
Performance of the last 12 months:
1- Industrial production: -0.22%
2- Payroll employment: -1.11%
3- Inflation-adjusted personal income: -2.48%
4- Sales of manufacturing and trade: +1%
And we had a technical recession in 2022 according to European interpretation of what a recession ist.
Three out of four factors have decreased but as long as Sales of manufacturing and trade continues to be positive, no recession should be announced any time soon (in theory).
